Stop Gambling in the Stock Market. Be an intelligent and confident investor.
See what the professionals see with financial analytics, charts and valuation models.
Fundamental Analysis and Stock Valuation Simplified. Learn more.

Wipro Ltd. | WIPRO | NSE - Computers - software

INR in Million. Fiscal year ends in March. Figures are consolidated and restated.

Intrinsic value and stock valuation

Market Capitalization and Net Worth

Net worth also called as "Shareholder Equity", "Stockholder's Equity", "Net Asset Value" or "Book Value". It essentially means total assets minus total liabilities.

When you buy shares of a company, you are essentially buying a share of the company's net worth and a share of the company's future cash flows. If the company's net worth and cash is growing, the value of the company is going up because of which the company's share price goes up.

The above chart displays the share price and the book value per share. Generally the share price is above the book value price but during a recession (e.g. 2008) or due to some other factors, the share price can go below the book value per share. Smart bargain investors buy shares when the current market price is below the book value i.e. the stock is undervalued but at the same time you have to ask yourself why the current market price is going below the book value price. Is it because of some serious fundamental problems with the company?

Stock Valuation Models

Valuation in simple words is the process of estimating what something is worth. The valuation models given below are used by investors like Warren Buffet, Investment bankers and private equity firms as the starting point for evaluating potential mergers and stock acquisitions. You can use the same models to figure out if the current market price of the stock is overvalued or undervalued. Do not blindly buy or sell stocks just because one valuation model tells you to although if three or more models come to the same result then it may be wise to act on that decision.

Remember investing is a combination of science and art. These models give you an estimate which may or may not be accurate. There are some things which cannot be captured by these models such as the value of a brand name or the value of a patent and other intangible assets. So keeping these few things in mind explore the section below and see the real picture of the company as seen by market professionals.

Current & Historical Price to Earnings Ratio of Wipro Ltd.

>

The P/E ratio looks at the relationship between the stock price and the company's earnings. The higher the P/E the more the market is willing to pay for the company's earnings.

By comparing price and earnings per share for a company, one can analyze the Market's stock valuation of a company and its shares relative to the income the company is actually generating. It is usually used to compare the P/E ratios of one company to other companies in the same industry sector. Ideally you should avoid investing in a company which has a PE Ratio greater than 20.

Wipro Ltd. Average PE Ratio is 17.0. Current PE is 11.1% lower than long term average

PE Ratio Valuation

Price per share = 10 Years Average P/E Ratio x EPS

Wipro Ltd.'s average P/E ratio for the last 10 years was 17.0 times, it's EPS is Rs.17.5 which gives us an intrinsic value of Rs.298 per share.

Discounted Cash Flow Valuation

The purpose of a discounted cash flow is to estimate the sum of the future cash flow of the business and discount it back to the present value.

We start with an assumption that we want to earn 10% on our investment yearly. So the question we are going to answer is "What price can I pay for Wipro Ltd. if I want to earn 10 percent annual return". We use the multi-year median Free Cash Flow growth rate for DCF valuation. The discount rate and the estimated cash flow numbers are then used in the net present value formula which calculates the intrinsic value of the company as well as the intrinsic value per share.

Multi Year FCF Compound Annual Growth Rate

Years

2008-2014

2009-2015

2010-2016

2011-2017

2008-2013

2009-2014

2010-2015

2011-2016

2012-2017

FCF Growth

34.6 %

22.5 %

9.3 %

16.9 %

41.0 %

25.0 %

11.3 %

18.3 %

21.6 %

Multi-Year Average FCF Rate : 21.56%. This is the rate which will be used for forecasting free cash flow values for the year 2018 to 2027.

Terminal growth rate : 0%. We take 0% because we just want to forecast values till 10 years in the future and not beyond that to be conservative.

Free Cash Flow : Forecast values table (Million)

Year

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

FCF Forecast

87,424

106,269

129,178

157,024

190,874

232,020

282,036

342,834

416,738

506,574

Wipro Ltd. is expected to generate Rs. 2.45 Trillion over the next 10 years.

We want to earn 10% or more on Wipro Ltd. so we have to buy that cash at a discount today. After all, we are buying Rs. 519.09 Billion of 2017 networth(equity) and the right to Rs. 2.45 Trillion of future cash.

Net Present Value(NPV) of Wipro Ltd. is 1.82 Trillion Rupees.

DCF Intrinsic value per share : 374 Rs.

EPS Growth Valuation

Similar to Free cash flow valuation model we project the Earnings Per Share for the next ten years. Then we use an estimated Price/Earnings ratio to calculate the future stock price which is then discounted back to present value giving us an intrinsic value per share.

Multi Year EPS Compound Annual Growth Rate

Years

2013-2015

2014-2016

2015-2017

2013-2016

2014-2017

EPS Growth

18.7 %

6.1 %

-0.4 %

13.3 %

2.6 %

Multi-Year Average EPS Growth Rate : 6.14%. This is the rate which will be used to forecast EPS 10 years from now.

Terminal growth rate : 0%. We take 0% because we just want to forecast values till 10 years in the future and not beyond that to be conservative.

Discount rate : 10%.

EPS Valuation Intrinsic fair value price per share is Rs.267

Graham Number Valuation

Graham Number was created by Benjamin Graham, the father of value investing. It calculates the stock's maximum fair value based of its Earnings per share and Book value per share. Stocks trading below their Graham Number may be undervalued.

Graham's Fair Value Price = Square Root of (22.5 x EPS x BVPS)

Wipro Ltd.'s intrinsic fair value price per share is 205 Rs.

Note - Graham number is useful for companies which depend more on their tangible assets (e.g. Manufacturing, Oil & Gas). It is not so useful for companies which depend more on their intangible assets (e.g. Pharma, IT).

Intrinsic Fair Value Share Price Range for Wipro Ltd.

DCF valuation

Rs. 374

PE Ratio valuation

Rs. 298

EPS Growth Valuation

Rs. 267

Graham Number

Rs. 205

Book Value

Rs. 107

Average Fair Value

Rs. 282

20% Margin of Safety

Rs. 226

Current market price

Rs. 264

Note - Margin of safety is a principle of investing in which an investor purchases stock only when the market price is significantly below its intrinsic value. This difference allows an investment to be made with minimal downside risk. The term Margin of Safety was introduced by Benjamin Graham (Warren Buffett's teacher) in his famous book The Intelligent Investor